States Refusing Expanded Medicaid Fuel Worst Losses

By Brian Chappatta -
Sep 12, 2013

Municipal bonds sold by hospitals
and health-care systems have been the market’s biggest losers in
the past three months. Debt from facilities in the 21 states
that aren’t expanding Medicaid is poised to fare even worse.

A key provision of President Barack Obama’s health-care
plan is extending care under the health program for the poor,
which is financed by states and the federal government. Where
politicians don’t go along, millions would be left uncovered,
costing hospitals more in uncompensated care.

Health-care related bonds are already posting the biggest
losses among revenue debt in the $3.7 trillion municipal market,
losing about 6 percent over the past three months, Standard &
Poor’s data show. In states that have rebuffed extending
Medicaid, securities of hospital systems have less appeal, said
Todd Sisson, a senior analyst at Wells Capital Management in
Charlotte, North Carolina.

“We’re going to see spread widening on hospitals in states
that are not expanding versus states that are expanding,” said
Sisson, whose company oversees about $31 billion in munis.
“States that aren’t expanding Medicaid are still going to have
a high percentage of the uninsured. The hospitals are going to
lose a lot of money.”

Arizona Gain

Republicans in Congress have sought to defund the
Democratic president’s health-care law, most recently this week.
Some governors from their party, including New Jersey’s Chris Christie and Arizona’s Jan Brewer, have still opted to expand
Medicaid. As online health-insurance exchanges are set to open
for enrollment on Oct. 1, investors are favoring systems in
states planning to extend coverage.

While 25 states are expanding, 21, led by Texas and
Florida, are leaning against the move, according to data as of
Sept. 4 from the Center on Budget & Policy Priorities in
Washington.

In South Carolina, where the Republican House majority
rejected the move, an agency in August issued about $139 million
of tax-exempt bonds for Palmetto Health. The system has
facilities in Columbia, South Carolina’s capital, and a hospital
in Easley, about 115 miles (185 kilometers) northwest.

A portion due in August 2030 yielded 1.6 percentage points
more than AAA munis on Aug. 9, data compiled by Bloomberg show.
The spread on the debt, rated BBB+ by S&P, three levels above
junk, has since narrowed about 15 percent.

Rally Point

Meanwhile in Arizona, where Brewer signed a law expanding
the program, two hospitals that issued bonds within the past two
months saw the yield penalty on debt with similar ratings and
maturities drop as much as 37 percent in the same period.

Tax-free bonds issued for the Yavapai Regional Medical
Center, north of Phoenix, and maturing in August 2033 traded
Sept. 5 with a spread of 1.19 percentage points. That was down
from about 1.88 percentage points on July 31, data compiled by
Bloomberg show.

South Carolina’s decision to not extend Medicaid shouldn’t
“have any quantifiable impact” on Palmetto Health bonds,
Tammie Epps, a spokeswoman, said in an interview. She cited
rating companies’ confirmation of the system’s grade.

The states’ decisions on Medicaid will determine the fate
of a part of Obama’s law that would make the program available
to those earning less than 133 percent of the poverty line,
which is $30,657 for a family of four.

Federal Funds

The federal government would pay 100 percent of costs for
those newly enrolled until 2017, when its share would begin to
drop to 90 percent. States may be leery of adding enrollees as
pressure on federal spending may put those funds at risk.

To offset the cost of insuring more people under Medicaid,
Obama’s proposal would curb a program that assists health
systems that treat low-income patients.

“States that are opposed to the ACA won’t see as much of
an increase in insured patients, and yet hospitals are going to
be whacked with reimbursement cuts,” said George Huang, a
senior analyst at Wells Fargo Securities LLC. “The hospitals
are still going to treat the same patients, and are going to get
even less than they did before.”

Hospital debt is among the lowest-rated in the muni market
because the facilities don’t have natural monopolies like water,
sewer and utility systems. The segment has an average grade of
four or five levels below the top, according to Barclays Plc.
Among 10 revenue-bond groups, only industrial-development debt,
which is backed by companies, has a lower mark.

Weight Reduction

The health bonds had beat the broad market the past four
years as investors sought higher-yielding debt with interest
rates at the lowest in a generation, Bank of America Merrill
Lynch data show. Lower-rated munis have declined in the past
four months on speculation the Federal Reserve will curb its
bond buying.

“If investors look to add spread, health care is the No. 1
sector,” said Chris Alwine, head of munis at Valley Forge,
Pennsylvania-based Vanguard Group Inc., which oversees about
$125 billion in local debt. “Our approach is raising our credit
ratings or looking to reduce weight to entities that may be
weaker for their rating.”

For the first time since fiscal 2008, not-for-profit
hospital expense growth surpassed revenue increases, a trend
Moody’s Investors Service called “unsustainable” in a report
last month.

To combat rising costs, health providers have increasingly
turned to mergers. There were 145 deals in the three months
through June, up from 125 the previous quarter, according to
Irving Levin Associates Inc. That included a deal combining
health insurer Highmark Inc. and West Penn Allegheny Health
System, which defaulted on its debt and was on the brink of
bankruptcy.

Haves Favored

Systems are combining in part to keep up with changes ahead
of the health-care law’s implementation. The administration has
said about 7 million people may enroll next year and it needs to
get millions of young, healthy customers to sign up to keep the
markets financially stable.

“It’s going to be the system of the haves and have-nots,
and that starts with which states are expanding Medicaid and
which are not,” Sisson said. “We favor the larger systems with
efficiencies that can get their cost structure down. Smaller
names are the ones that are going to struggle.”

Municipalities are set to sell $7.7 billion in long-term
debt this week, the most since July.

Market Rates

At 3.1 percent, yields on benchmark 10-year munis are
poised for their biggest weekly decline in more than a month.
The interest rate compares with 2.91 percent for similar-maturity Treasuries.

The ratio of the yields, a gauge of relative value, is
about 107 percent, compared with an average of 93 percent since
2001. The higher the figure, the cheaper munis are compared with
federal securities.

Following is a pending sale:

Richmond, capital of Virginia, plans to sell about $143
million of general obligations as soon as today to refinance
notes sold last year, preliminary sale documents show. The
competitive deal, which matures over 20 years, will finance work
such as school projects, according to the city. Moody’s grades
the securities Aa2, third highest. Income from about $131.5
million of the bonds is tax exempt, while federal levies apply
to $11.3 million.